Resilience & Adaptability Define The Lower Middle Market

Well into 2023, the lower middle market has shown resilience and adaptability in M&A transactions during the post-pandemic era. While the first half of the year posed challenges for dealmakers, deal volumes still remain higher than pre-2020 levels.

M&A Advisors See Resilience in the Markets

The lower middle market remains active with lenders willing to provide financing for strong deals. As buyers shift their attention toward smaller, more manageable opportunities, lenders are still able to support valuable deals.

While a slight deceleration in new deal activity occurred toward the end of 2022 and into the early months of 2023, around mid-April, the lower middle market saw an upsurge in seller inquiries.

Sellers who previously were on the sidelines are poised to bring their businesses to market, though we are seeing greater demands for detailed financials and forecasts and slightly more caution on the buy side than during the pandemic-era deals;  this means that quality companies have a competitive advantage. 

What Drives Value in this Market Cycle?

As in previous cycles of transformation, the current M&A landscape has shifted, reflecting a new normal. However, it’s important to note that fundamentals remain consistent for well-run companies with strong cultures and strong management teams. 

For quality companies, healthy multiples remain and partnering with the right advisory team makes a critical difference. The talent and dedication of an experienced advisory team helps entrepreneurs to earn more when navigating the current market, especially when it comes to:

• Valuation: Investment bankers play a crucial role in determining the market value of a business involved in an M&A transaction. We conduct comprehensive financial analyses, assess market conditions, and evaluate comparable transactions to determine the valuation range for the entrepreneur’s company. 

• Deal Structuring and Negotiation: Investment bankers assist entrepreneurs in structuring the M&A transaction to optimize their financial outcomes. We help identify the most advantageous deal structures, which may involve a combination of cash, stock, or other considerations. SEA also acts as skilled negotiators, representing the entrepreneur’s interests in discussions with potential buyers or merger partners. Our expertise helps secure favorable terms, including purchase price, earn-outs, and post-transaction management roles, to enhance the entrepreneur’s financial gain.

• Competitive Bidding and Auction Process: In situations where multiple parties are interested in acquiring the entrepreneur’s business, investment bankers employ competitive bidding processes to drive up the acquisition price. We strategically manage the auction process, soliciting offers from interested buyers, and creating a competitive environment. By generating increased demand and fostering a sense of urgency among potential acquirers, SEA helps entrepreneurs achieve higher sale prices and superior deal terms.

• Due Diligence and Transaction Execution: Investment bankers provide invaluable support during the due diligence and transaction execution stages of an M&A deal. We work closely with the entrepreneur’s legal and financial teams to ensure all necessary documents are prepared, financial records are audited, and potential risks are identified and mitigated. By meticulously managing these crucial aspects, SEA helps minimize transaction delays and risks, allowing entrepreneurs to complete the deal efficiently and optimize their earnings.

Opportunities for Entrepreneurs 

As we navigate the post-pandemic landscape, entrepreneurial businesses that are proactive in embracing change and innovation will emerge as leaders. Buyers are increasingly looking to high-performing yet more affordable, smaller deals as a hedge against recession fears. 

As the low-interest rate that fueled the M&A frenzy of the previous years recedes, continued interest has been driven by the historic levels of capital raised over the past decade. 

Growing Investor Confidence 

Private equity investors have regained confidence as the uncertainties of the pandemic recede. The resilience demonstrated by portfolio companies during the crisis has underscored the long-term viability of private equity investments. Investors recognize the potential for strong returns in a recovering economy and view private equity as an attractive asset class.

Despite facing challenges, the lower middle market continues to show remarkable resilience. While global M&A headlines have disproportionately focused on a sense of uncertainty around megadeals, the lower middle market continues to exhibit strength and resilience. 

How to Take Advantage of the Current M&A Market 

SEA’s deep bench of advisory experts have the operational experience to navigate challenging market cycles and produce exceptional outcomes. 

Entrepreneurial-minded business owners can maximize their exit options by partnering with an advisory team that understands market dynamics, emphasize quality, and are able to adapt deal structures to current market conditions. 

When entrepreneurs work with SEA, they are able to unlock significant value through M&A. Whether you find yourself on the buy side or the sell side of a transaction the first step toward realizing your financial goals is to speak with an experienced senior-level advisor. 

At SEA, we listen to you to understand your transition goals and tailor our process to execute a clearly defined outcome. Call us anytime (215) 489-8881 or schedule a conversation here.